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Banking Sector Facing Consolidation, Digitalization

The Hungarian banking sector saw profits jump 50% last year and domestic ownership further growing, according to the latest data from the National Bank of Hungary (MNB). Despite speculation about the state possibly selling Budapest Bank, we appear to be looking at a healthy sector that might face some kind of concentration, MKB Bank tells the Budapest Business Journal.

The latest central bank report pointed out that the after-tax profit of the banking sector was up by 50% to HUF 632.4 billion in 2017, chiefly lifted by higher revenue from commissions and fees, and freed up risk provisions and the lower corporate tax rate, as reported by national news agency MTI.
“If you compare the size of the Hungarian economy and its banking system to regional peers, the conclusion is that we have a much less concentrated banking system and many universal players,” Dr. Ádám Balog, CEO of MKB Bank (formerly Hungarian Foreign Trade Bank) tells the BBJ. 
MKB believes that the Hungarian banking system is healthy and profitable, with clear underlying trends, which is facing, if not already undergoing, a gradual change fueled by innovation, as wells as cost and regulation pressures. 
“These forces will eventually lead to some kind of concentration of the Hungarian market as well. The pace and timing of this adjustment is the real unknown factor; I would say that four or five universal banks are likely to stay and the transformation would happen within five years,” the MKB CEO adds.

Improving Relations

The Hungarian government lowered the bank levy rate on January 1, 2017, to 0.15% for up to HUF 50 bln of the tax base, and 0.21% on the amount above that - down from 0.24% the preceding year, according to a Reuters report. This helped significantly improve relations between the banks and the government; the levy, introduced in 2010 at 0.53% as a temporary measure, though it still lingers on, caused uproar in the market at the time.
“Relations have improved significantly. The bank levy was reduced, generally the market environment is more beneficial due to past years more favorable global economic situation and the pro-growth decisions by the fiscal and monetary policy authorities. MNB’s “Funding for Growth Scheme” played a vital role to avoid a credit crunch for the SME sector and supported lending to close to 40,000 enterprises. There are many regulatory changes underway, whether it be on instant payment or the implementation of the PSD2 regime. I see a cooperative atmosphere,” Balog says.
The Hungarian government has in the past been vocal about its willingness to keep reducing the banking levy, provided the banks increase their lending. Apparently, cutting the burden has had a beneficial effect. “There is a very positive trend in households’ savings. In the last four years alone the volume of household gross financial assets increased by 35%, more than HUF 12 billion. This increase was supported partly by the favorable wage developments,” says Balog.
Furthermore, banks do appear to be lending more lately. “The last two years have witnessed a significant lending volume increase both for corporates and retail clients in line with the consolidated and balanced growth environment,” MKB tells the BBJ. 
“Unemployment is at historic lows, there is a double-digit wage increase while customers also benefit from the low interest rate environment. This can be seen in the statistics as well: mortgage lending volumes increased by 40% in 2017 compared to the previous year, while personal loan lending volumes increased by almost 50%. Outstanding corporate loans increased by close to 10% compared to 2016. At MKB Bank we were able to considerably outperform the market in 2017,” the CEO adds.

Eyes on Budapest Bank

The reported sale of Budapest Bank, currently owned by the government, has sparked speculation about who might bid for it. While MKB Bank was cautious about the reports, and declined to comment directly on the matter, Balog offered something of a hint.
“As mentioned, the seller is the state and as the owner it is its decision. I would not anticipate any new participants, thus the real question from the buyers’ perspective is who could get most synergies and value out of such a deal. I think if circumstances are given and MKB would get an invitation, we would, for example, analyze Budapest Bank, as we see synergies in case of a potential merger.” 
The state bought Budapest Bank in June 2015, when Corvinus Nemzetközi Befektetési, a unit of the state-owned Hungarian Development Bank group, paid USD 700 mln to General Electric Capital Group for 100% of the bank’s shares, according to a report by MTI. Should the state decide to sell Budapest Bank in the future, if the buyer is not a Hungarian entity, domestic ownership in the market would fall below 50%, which the government has long targeted as its minimum threshold.
Like any other sector or business, banking is also facing huge digital transformation. A few years ago, participants at a banking summit in Budapest pointed out that banks were significantly lagging behind as far as technological solutions were concerned, some even saying the sector’s approach was traditional globally. Today, more and more banks offer not just online banking, but fast mobile application-based banking and solutions, not to mention contactless payment.
“Currently the main focus of bank managers is on digitalization and the fintech world. In the next decade we will face a gradual shift towards innovative solutions that will make our customers lives easier, focusing ever more on client needs, fast and tailor-made solutions,” Balog says.
“This is explained by the change in client needs of the digital generation, the emergence of new technologies and adjustments in regulation. This will be visible in business models, in products/services and also in the channels through which banks serve their clients. We at MKB Bank very much believe in digitalization; we very much focus our efforts to build a bank based on traditional values but with an innovative approach that benefits our customers,” the CEO concludes. Editor’s Note: All the major banks were contacted to contribute to this article, but all the others declined, one going so far as to say: “We do not answer such questions.”

Market Shares

National Bank of Hungary  data reveals that market concentration only slightly changed during the last year as compared to 2016. The ten biggest financial institutions held a total of 71.7% market share, while the five biggest lenders cut out a 49.5% slice of the pie. Additionally, the ratio of domestic ownership in the sector edged up just a tiny bit to 55.4% of total assets from 54.7% at the end of 2016.